Jobless Claims Dip, But How Low is Too Low a Rate? – Daily Mortgage Rate Update for August 26th, 2010

New claims dip to 473,000; Durable goods orders, new home sales weak; Treasury auction shows little appetite for low-yielding notes – Daily Mortgage Rate Update for August 26th, 2010

The Labor Department reported that 473,000 Americans filed new claims for unemployment assistance in the past week, down from the prior week’s revised 504,000 claimants. Analysts had been expecting the decline, but to a smaller degree, closer to 490,000.  The four-week moving average climbed to 486,750, a level suggestive of a continued shortage of jobs. Economists generally consider weekly claims of 450,000 or less to be consistent with stable or growing employment.

Today’s employment data is significant, as it highlights the job market that will come under intense focus next week. Remember that the first Friday of each month brings the monthly employment situation report from the Bureau of Labor Statistics, commonly known as the jobs report. Next week’s report should be even more influential than others recently, as it will be free of distortion that has been caused by the recent hiring and subsequent layoff of almost 500,000 temporary census workers. It is a little early to gauge the contents of that report, however, in spite of the negative data recently, I do expect it to show at least some small degree of employment growth, with at least 20,000 private sector jobs added. Unfortunately, that number is too few to make a meaningful dent in the current 9.5% unemployment rate.

Yesterday’s economic data were highlighted by reports on durable goods orders and new home sales showing weakness in both sectors. If it weren’t for huge orders received by Boeing at last month’s Farnborough Air Show (you heard it here first!), durable goods orders would have tumbled 3.8% in July, further sapping hopes for recovery. With the help of commercial aircraft orders rose 0.3%, but we can’t expect another such bounce from Boeing. New home sales also fell last month, to an annual pace of 274,000. No one should really be surprised by this – July was the first month of data with no meaningful boost since the expiration of the home buyer tax credit – however, Wall St. behaved as if this was completely shocking. Stocks ultimately recovered, though, by the end of the day.

One question I have been asking myself lately, is how low is too low? The yield to investors on 30-year mortgage-backed securities is under 3.5%, and Treasury notes of similar duration are yielding a mere 2.55%. There comes a point where investors will not want to buy these securities if their returns are so low they fail to exceed investors expectations for future inflation. At present, fears of inflation are decidedly muted, however, some, like Kansas City Federal Reserve Bank Chairman Tom Hoenig, feel that inflation is a very real threat to our economy at this time. The recent Producer Price Index showed that price increases may have started at the wholesale level. If that is the case, there will come a time when investors refuse to purchase lower-yielding debt in favor of higher returning investments, and that will cause mortgage rates to increase. That time could be a long way away, though.

Mortgage pricing is somewhat better this morning, after sliding throughout the afternoon yesterday, after an auction of 5-year Treasury notes saw less demand and required higher rates than expected. The short-term outlook for mortgage pricing is for a relatively stable average, but with substantial day-to-day fluctuations. Add to this that we are at the recent high-water mark for mortgage pricing, and I would suggest locking rates for loans closing within 7-10 days. It is safe to float later closings; even if pricing worsens, it is likely to improve back to current levels.

Tomorrow brings the Preliminary 2nd quarter GDP report, the 1st revision of that figure, and it is expected to show that GDP grew by an even lower amount than previously expected, possibly by as little as 1.4%. My gut feeling is that this estimate is a little too low, and that we may see something a bit higher, which could cause mortgage pricing to retreat slightly. If you have questions regarding Rhode Island Refinance Rates, or whether or not to lock your loan, please don’t hesitate to contact me by cell at (401) 263-8655. Have a great day!

Related articles:

Daily Update for August 24th

Weekly Recap for August 16th-20th

Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and serves as an Adjunct Professor of Finance and Economics at Roger Williams University and the University of New Haven. He has been helping homeowners and homebuyers with their mortgage questions for over 10 years.

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